Video transcript

I used simplified
numbers when we first thought about how the Chinese
government can intervene in foreign currency markets to
keep their currency devalued. What I want to do this
video is to actually look at some of the real numbers. So this is from the US Bureau
of Economic Analysis, bea.gov. This is the URL where I
actually got this data. And this right over
here is the US balance of payments relative to China. And this part right over
here is the current account, which really tells us the
imports verses exports. And this over here is
the capital account, sometimes called the
financial account, depending on how you
are accounting for it. And this tells us about
inflow or the outflow of ownership of assets. So this is goods,
this is assets. You could think of it's
money, or securities, or other things like that. Now you can look. From 2006 we did
export some things to China. $72 billion
worth in 2006, this is in millions of dollars. So $72,000 is $72 billion. Increased to $85
billion, $95 billion. Stayed at $95 billion in 2009. But the United States imported
a ton more, $330 billion. $330 billion in 2006. $380 billion in 2007. Almost $400 billion in 2009. So we're running almost a $300
billion trade deficit in 2008 relative to China. And then in 2009 it
goes down a little bit. This looks like about $260
billion trade deficit. And that's really just
because we imported, or the United States
imported, fewer goods. And to a large degree
that was probably because of the US recession
where consumption in general, slowed down. So we would have bought
fewer goods and services from pretty much anyone,
including ourselves or China. Now you can see
that being offset in the financial account. This, to some degree,
tells the story. It done give us the full
story, of the Chinese. And this isn't just
the Chinese government. This is all Chinese
ownership, that they are increasing their
ownership of US assets. And those assets, they could
be US Treasury notes and bills. These could be US stocks. This could be US real estate. But you can see each year,
and this is the increase, Americans are buying assets
in China. $5 billion in 2006, $2 billion in 2007, $12 billion
in 2008, $18 billion in 2009. To some degree this is
limited by restrictions imposed by the
Chinese government. But you could see
the Chinese are buying way more
assets in the US. And this really kind of is part
of that picture of the Chinese, especially the Chinese
central government, is buying US assets. To do that, they
have to buy dollars with yen, which keeps
the dollar strong and allows their
currency to stay weak, wish to some degree allows--
or to a large degree-- allows this balance of the trade
deficit to stay where it is. Now, I'll leave you
with one conundrum. To a large degree these
numbers right here, they are offsetting the
trade deficit, and especially in 2008, the Chinese bought way
more US assets than actually even the trade deficit. They more than made up for it. But in 2009, you
don't see them buying enough to make up for
the trade deficit. They bought $143 billion. And actually on a net basis,
it'll probably be about $120 something billion,
which doesn't make up for the whole $260 billion. So how did they still keep
their currency pegged? And the answer, and we'll
look at that into more detail, is they don't have to
directly buy US assets. They could buy assets, or
they could buy currency from another country. And that will put upward
pressure on that currency. So let me put it over here. China could go and
buy US currency. Or it could go to
another country and buy their
currency, country A. And then country A is
going to feel pressure. It's currency is going
to go up in value. And it doesn't want that because
that would hurt its trade. So then it might go and buy
US assets to keep it devalued. And that would not
show up in that chart. But we'll look at that
in the next video. This is Salman Khan of
the Khan Academy for CNBC.